Budgeting with envelopes is a simple, systematic way to pay bills and save money. Setting aside the funds you need for bills while balancing your outgoings is the best way to stick to your budget. Envelope budgeting is a popular way of keeping on top of your “comings and goings” and is made even easier with some of the great finance software and apps on the market.
What is the Envelope Budgeting method?
In envelope budgeting, you divide your income across various categories of expenditures — bills, groceries, petrol, car insurance etc. You will take that amount in cash and put it into an envelope after you have decided how much each category should cost. You should use the funds in the envelope for only the bills or purchases in that category. By limiting what you can spend, you are protected from overspending.
No matter how you pay your bills, the principle works and can be applied through software or other apps. Some of the newer challenger banks like Monzo and Revolut enable this through their sub-accounts and “pots” really easily.
Envelope budgeting has the advantage of forcing you to keep track of your spending habits – if the envelope is empty, you cannot buy anything from that category until the next paycheck.
How to start an Envelope Budget
Step 1. Create spend categories and limits
First, set spending categories for your budget and then limit how much you can spend in each category.
Your monthly income mustn’t exceed the sum of all your spending categories.
Consider where your money goes to determine which categories might be useful. Group your common expenditures to make them easier to manage. As an example, your categories might include:
- Buying food
- Petrol / Transport
- Clothes
- Weekly takeaway/dining out
Consider your specific situation when creating your categories. You can create as many categories as you need, but not too many to cause confusion. Get an idea of your usual costs by checking your recent banking statements or receipts. It’s fine to use that number, or you can use a lower number if you’re trying to cut back.
As well as your usual costs, make sure to include irregular expenses such as MOTs, insurance, and gifts – I’d also recommend adding a specific savings envelope for luxuries such as holidays or new cars so that you’re not relying on finance when the time comes to buy.
Step 2. Clearly label each envelope
Write the category name and the monthly budgeted amount on one envelope per spending category.
If you get paid fortnightly or weekly, divide the monthly total by the number of pay periods you have in each month, then record those figures on your envelope too. That way you’ll be able to always have the right amount set aside in each envelope.
Step 3. Carve up your paycheck
Let’s say you receive a paycheck of £1000. Put the budgeted amounts into the appropriate envelopes after you receive your paycheck. Here is a simple example:
- £200 in the food budget envelope
- £400 in the rent budget envelope
- £140 in the transport budget envelope
- £60 in the utility bills budget envelope
- £200 in the savings budget envelope
Whenever you receive a paycheck, add that amount to each cash envelope based on your budget.
Step 4. Spend money ONLY from the correct envelopes
You should take the money from the appropriate envelope whenever you go shopping or pay a bill. For instance – when you’re out at the supermarket, take your grocery envelope with you.
Any remaining money from the previous month can be stored in the envelope for the next month to be spent, or it can be removed and saved or added to an emergency fund. This can help you reach your savings goal, which in turn can help you stay on budget.
Modern Envelope Budgeting Methods
It may seem a bit old-fashioned to use a cash envelope budget in a world where there are direct debits, electronic transfers, debit cards, credit cards, and BACS payments to make life easier – and you’d be right – but there is another more convenient way.
Envelope budgeting software that is built around convenient financial transaction methods while keeping the discipline of envelope budgeting is available and super easy to use. Tools such as You Need a Budget allow you to define budget categories, track spending activity and see how much each budget category has spent. Your income is distributed among “envelopes,” and when you make a purchase, you tell it which spending categories you want to use, and the software deducts the funds from these envelopes.
If a bill is paid directly, the software removes the payment amount from the appropriate envelope. In the case of a credit card payment, the software can set aside that amount in a credit card payment “envelope” or category for use when you pay the credit card bill.
There are a whole host of apps to help here – why not try your hand at digital envelope budgeting today?
FAQs
The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes. Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes.
How do you budget using the envelope method? ›
The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes. Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes.
How do you do the Dave Ramsey envelope system? ›
Put that cash in an envelope and label it “Groceries. '' Every time you purchase “groceries” it must be with money from that envelope and only that envelope. If you go to the grocery store and realize you don't have your envelope, you don't whip out the credit card or debit card for payment.
What is the 50/30/20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is the envelope strategy? ›
At its core, the envelope strategy involves dividing finances into distinct categories, each earmarked for specific expenses or financial goals. Simplicity Meets Effectiveness. The beauty of the envelope strategy lies in its simplicity.
What is one potential downside of using a cash envelope budget? ›
You may also feel unsafe carrying cash, as it's harder to track it when it's lost or stolen. It can be cumbersome to get started: Getting all the envelopes ready and allocating money into categories can take some time to set it all up, especially if you haven't created a budget before.
Is cash stuffing a good idea? ›
Benefits of cash stuffing
While other budgeting methods merely track your spending, cash stuffing physically prevents you from going over budget. Once an envelope is empty, you can't spend any further. That makes it useful if you're an impulse shopper or find yourself coming up short every month.
What is the 70 20 10 Rule money? ›
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
What is the 100 envelope trick? ›
It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random. After you've filled up all the envelopes, you'll have a total savings of $5,050.
What is the cash stuffing method? ›
The basic premise of cash stuffing is that you set aside cash for different budgeting categories at the beginning of each month. The goal is to spend no more than that cash you've set aside for each category.
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
How to budget $5000 a month? ›
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
What is the envelope budget trick? ›
To begin, a good rule to follow is the 50/30/20 method: 50% of funds go to needs, 30% wants and 20% to financial goals. Make an envelope for each category that applies: rent, utilities, phone bill, gas, groceries, emergency, savings and leisure. Put aside cash in each envelope corresponding to the amount used.
Does the envelope method work? ›
Cash envelopes are powerful weapons in the fight against overspending. They can help you manage your money better than you ever have—and help you reach your money goals faster. Put the cash envelope system to work and get intentional about how you're spending your money.
What are examples of the envelope method? ›
Each category gets its own corresponding envelope. Whatever money you allocate to each category, put it in an envelope with the same name. I.e., if your grocery budget is ₹ 8,000, put ₹ 8,000 in an envelope marked “Groceries.” That is the envelope budgeting system in a nutshell.
How do you fill out a good budget envelope? ›
Click on the “Fill Envelopes” icon to get started. This will take you to the Fill Envelopes page where you can choose how you'd like to fill your Envelopes. Goodbudget will use your Available funds to fill them. You can use the Quick Fill drop-down menu if you'd like to apply the same change to all of your Envelopes.
How does the envelope challenge work? ›
It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random. After you've filled up all the envelopes, you'll have a total savings of $5,050.
What budgeting app uses the envelope method? ›
Goodbudget helps you to stick to your budget limits without the hassle of keeping actual cash in physical envelopes. It's available on the Web, iPhone, and Android. Save for big expenses, share household expenses, and budget on the go.
How to use the envelope system without cash? ›
Instead of stuffing your spending envelopes with cash, use gift cards. At the beginning of the month, purchase gift cards that correspond with your various spending categories. For example, you might get one card for groceries, another for gas and another to use for entertainment purchases.
